Gold News

Gold's Monetary Return

Why Gold Bullion is set to once again be a part of the world's monetary system...

HERE ARE two questions gold investors should ask themselves, writes Julian Phillips of GoldForecaster.com.

"If the days of the Dollar are numbered, how will gold be used in the monetary system that follows? Will there be a global monetary system that all nations subscribe to or will the monetary world fragment?" 

For one thing, we will continue to live in a global world with nations trading amongst each other. To gold investors, such an eventuality – let alone its potential reality—would cause a return to the use of gold as a foundation for any monetary system, but not as a means of exchange, ever again. 

That journey has already started. Whether in a cooperative or uncooperative world, gold will have to provide international liquidity and facilitate trade between nations in place of the Dollar. This will include the US too. The world is headed irrevocably to a multi-currency system with the Dollar as one of the world's leading currencies, but not the sole one. Gold, as always, will have to inspire the trust it once did. It will have to fill the gap left by the world of currencies that occurred when the developed world removed itself from gold and at the same time removed currencies from supplying adequate measures of value.

It is appropriate to look at whether we will see the likes of the gold standard again.

Federal Reserve chairman Ben Bernanke has given a series of lectures on the gold standard and its performance. What he said about it was quite correct. What he said was a critique of the gold standard with a view to dismissing it. It's a pity he did not address the question of gold's future as a contingency plan, which we are sure has been discussed thoroughly by the Fed and with the input from the other developed world central bankers. 

After all, when Alan Greenspan said that "Gold is money, in extremis" he was right then and in the future. Few people would deny we have moved into extreme times for most nations. A fact that we have seen a glimpse of (central banks and the Bank for International Settlements are quiet on these points) has been that in the last two year gold has been used amongst banks and nations to facilitate loans and to lower their interest costs. 

So much has been written about the failings of the gold standard, but what has been omitted when a comparison to today is made, is that the gold system was designed for its time and it succeeded very well in that context, with that stability and those values. Then those values changed, the situation governing money changed and this frozen, fixed system did prove inadequate for the days that followed. What is missed from the criticism of that system is that it was a system that used gold as the foundation for the system of money of that day. 

It wasn't gold that was at fault, it was the system that used the gold.

Today, gold has done what it did then. It has proved to be a measure of value, a counter to the swings in the value of currencies. In the days of the gold standard, the notes issued against gold were based on the value of gold which was fixed. In essence, the devaluation of gold in 1935 was an instrument to expand the amount or supply of money. Prior to that and a basic cause of the depression was an insufficient money supply. The devaluation of the Dollar assisted in the US recovery at the time. The subsequent gathering of gold into US vaults gave financial credibility to the US monetary system.

Why and how was Bernanke correct? He discussed the system called the gold standard with its fixed exchange rates and fixed price of gold. This can no longer happen for the reasons he gave. Today, we have neither. Going back to a fixed price of gold or, more importantly, to fixed exchange rates would be insane. The current misfortunes of the Eurozone are amply demonstrating this as rich countries and poor countries use the 'fixed' exchange rate of the Euro between themselves. We will see this decade old experiment founder for the same reasons eventually after a long and painful process that could last another decade.

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JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

See full archive of Julian Phillips.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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